I'm a private money manager and freelance writer focused on Peak Oil and Climate Change as investment themes. I manage portfolios for individual clients and am co-manager of the JPS Green Economy Fund, a hedge fund open to accredited investors looking for exposure to Peak Oil and Climate related themes. I no longer write for Forbes, but I'm Editor at AltEnergyStocks.com, where I've been analyzing clean energy stocks since 2007. I live in Upstate New York, and am a runner and a woodworker. Since I write for several sites, you can follow me on Twitter, where I tweet new articles and links to other things that catch my eye on the web. DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This blog contains the current opinions of the author and such opinions are subject to change without notice. Blog entries are distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Finavera's Wildmare Wind Energy Project is one of three projects in Bristish Columbia to be sold to Pattern Renewable Energy Holdings Canada for C$40M. An earlier sale to of Wildmare Innergex Renewable Energy fell through in September. Photo source: Finavera.

On October 1st, following the failed sale of Finavera Wind Energy’s (TSX-V:FVR, OTC:FNVRF) 77 MW Wildmare Wind Energy Project to Innergex Renewable Energy Inc (TSX:INE, OTC: INGXF), Finavera announced that it was in talks with three potential bidders and would review all offers for the company. Finavera did not have much choice in the matter: the proceeds of the Wildmare sale had been needed to repay an overdue note to GE.

While Finavera talked about its plans as a “Corporate Transaction,” most investors (including me) assumed the process would conclude with a sale of the company. The stock promptly shot up approximately 70% from the 20-25 cent range where it had been trading to the 35-40 cent range in anticipation of a sale.

Market Reaction

As it happened, after reviewing the offers, Finavera decided to accept a financing deal and project purchase agreement from Pattern Renewable Energy Holdings Canada. According to Finavera CEO Jason Bak in an interview, what sealed the deal was Pattern’s willingness to refinance the GE note immediately, and provide financing at 10% for project development going forward once shareholders approve the deal. While there were offers for outright purchase of the company on the table, none of the bidders would have been able to perform as quickly as Pattern and satisfy GE. As a result, Finavera’s board, which contains four of the company’s ten largest shareholders and collectively owns 35% of the company’s stock, chose to sign the deal with Pattern.

Since many investors had been anticipating an outright sale, the announcement of the deal sent some scurrying for the exit. Thin trading over the holidays compounded the problem, and Finavera’s stock plummeted from near $0.40, where it had been trading before the announcement, to the low 20 cent range, which created a tremendous buying opportunity. I personally nearly doubled my holdings on Thursday and Friday.

Valuation

While the Pattern deal does not provide immediate liquidity for shareholders, it does make the company much easier to value. Over the last year, investors’ biggest concern about Finavera has been the lack of financing, a problem which the Pattern deal will solve. In addition, the deal sets a price for Finavera’s project portfolio in British Colombia, to be paid when the projects reach financial close (i.e. all permits are in place and the project is ready for construction.) Bak estimates that this will be achieved for the more advanced projects in 2013, and the later projects in 2014.

Hence, Finavera should receive approximately C$40 million for its projects from Pattern before the end of 2014, in addition to C$9.3 million for reaching financial close on its Cloosh wind farm in Ireland in 2013. Offsetting this against Finavera’s existing liabilities of C$18.3 million (about C$2-3 million of which Bak says are likely to be renegotiated) we have a net cash value of Finavera at the end of 2014 of about $30 million. This assumes that the renegotiated liabilities and the residual value of Finavera’s 10% stake in the Cloosh project mostly cover ongoing development costs. With roughly 40 million diluted shares outstanding, that places the value of a Finavera share at roughly C$0.75 at the end of 2014.

Some allowance needs to be made for the time value of money, as well as the possibility that site development will not go as smoothly as Bak expects. If we use a 50% discount to cover that risk, we still arrive at a value of C$0.375 per share., or 67% more than the current price of C$0.225. I expect Finavera to quickly rebound to at least the C$0.30 range over the next few days or weeks, as liquidity returns to the market, and investors revalue the stock based on the agreement with Pattern.

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Tom, thanks for looking into this situation. However, I’m still disappointed. I’m fine with everything that you mentioned in the article, but what worries me is that we have a company that has no pipeline? How much does it cost and how difficult is it to obtain and build wind farms?? Did you ask Bak about his plans in regards to the pipeline? I was really hoping that Bak was going to say that he has his eye some promising wind sites and has a few places where he wants to put the cash when he gets it. Anyhow, thanks again Tom you do great work and I enjoy your websites.

Tom Did Jason explain why he has not shared any information with stockholders since this agreement was announced? While I appreciate he shared his reasons with you he has been very disrespectful of other stockholders including myself. For this reason my confidence in Jason et al has taken a hit. Perhaps I am expecting too much!!!

He told me he had personally spoken to all shareholders who had called the company. If you tried to contact the company and did not get a response, I’d very much like to know about it. I understand that he will also be holding a conference call on Jan 7th.

hey tom, who did you think will be the owners of this company ? who id you think will be the responsible (has to be reporting) the ceo or the shareholders (owners). i can only agree with jim m. that our j.bak is more than disrespectful to the real owners of the company.

why telling everybody “we will sold the company in total” and doing the complete other, without any notice infront of the deal, nor asking the real owners about their opinion.

doing a cc after he gets attacked is not only bad, it shows that he is not knowing how to run a company.

talking about shareholders value and at the end ignoring, like “what´s interest me my talking from yesterday”, this means to me that he is only seeing his own situation. he get´s fired. that´s my impression.

fenchel

p.s. by the way : happy new year and a lot of healthy to you and everybody.

Shareholders have to approve this deal, so we will be asked. All that has been agreed to is that the board will present the deal to shareholders with its recommendation. For that, they got the immediate refinancing of the GE note (at 20%) – if shareholders approve the deal financing going forward will be at 10%

If a buyout offer comes along, shareholders will be able to vote on that, too. But it will have to be at least C$0.45 a share to get my vote, since it will have to be better than this deal.

Tom – I’m trying to understand the Pattern deal. Can you help me break it down? You seem to be saying that there are two separate deals – a refinancing deal and an asset purchase agreement. Is this what is happening …?

Under the refinancing deal, FVR took the overdue GE note ($9million at 25%) and exchanged it for a new loan for $9million at 20% from Pattern. (You said FVR’s current liabilities are $18.3million, so that leaves FVR with another $9.3million in debt to service by some other means.) In exchange for re-financing the GE note, FVR agreed to take the asset purchase agreement to a shareholders’ vote and make a board recommendation.

As for the asset purchase agreement, it operates in two stages. The first part of the deal happens upon shareholder approval. It says that Pattern will acquire the four projects by paying FVR $11million. FVR must apply the $11million to the debt it owes to Pattern (which will basically clear the old GE note but leaves FVR’s other debts intact), and then Pattern will provide FVR with a further debt facility at 10%.

Then, the second stage of the asset purchase agreement provides for the possibility of some future payments to FVR. It says that if Pattern brings any (or all?) of the projects to construction, Pattern will pay FVR a further fee based on a proportionate share of a $29million fund. I think that amounts to about $96k per MW if we are talking about 301MW across four projects. That means that Pattern can end up buying Tumbler Ridge (50MW) for about $4.4million. Also, Pattern can clawback and use those future payments to retire any debts that FVR might owe Pattern.

I think you basically have it right, except for the numbers in the sale. The full $40M will go to buy the 301MW of projects, so Pattern will buy the projects at $130K /MW when they reach financial close. Some of the proceeds of these sales will go to pay down Finavera’s debt, but reducing the $40M by the $11M is double counting.

Thanks very much for your reply. I am still a bit confused about the triggers and the amounts of the sale payments. The FVR press release says: “Approximately $11 million will be paid to Finavera upon shareholder approval and on the completion of the acquisition of the project companies with the balance of $40 million being proportionally payable upon all projects proceeding into construction and obtaining construction financing.” So, are you saying that the refinancing of the GE note has already been completed. And that the $11 million payment will be triggered when the following two things happen: (a) the shareholders approve the deal, and (b) the project companies are transfered to Pattern? The press release seems to say that both of those things are expected to happen on or before March 30? And then Pattern will also potentially pay a further $40million (pro-rated by project) if the projects reach financial close? I can kind of understand how that works, but I don’t think I’m double counting because if the $11million is not part of the $40 million total then I would have thought it would have been announced as a $51million deal?

My understanding was that the $11 million payment on shareholder approval is still debt at 10% which will be used to refinance the 20% note, but I think your interpretation could be the right one. I certainly don’t think this is a $51M deal. Something you can ask Bak in the conf call tomorrow.

Regardless of which interpretation you use (mine or yours,) my total sums for late 2014 are little changed, as is my valuation. Valuation may be a little higher with your interpretation, since the $11M would not be debt and therefor carry no interest, but this difference is minor compared to all the other uncertainties.